Jamie Golombek | 13/03/02
With RRSP season now behind us, this weekend marks the unofficial start oftax season, which can be a source of pain and frustration for many Canadiansbut, apparently, not for everyone.
Believe it or not, some Canadians enjoy filing their tax returns accordingto a new national survey commissioned by Thomson Reuters, the makers of the taxsoftware program UFile. The survey found that 41% of Canadians enjoy filingtheir tax returns, but the majority still do not.
Of those who dread the process, Canadians surveyed cited “confusion, timerestrictions and too many receipts to keep track of” as the top three reasonsthey dislike tax time.
The survey also asked Canadians how they will do their 2012 returns. While49% said they would use an accountant or professional tax-preparation service,31% said they would do it themselves using a tax software package on theircomputer or via the Internet. Only 14% said they would do it the old-fashionedway, “by hand.”
But even if you ultimately plan to go to an accountant ortax preparer to file your return, taking a stab at your own tax returnpreparation can prove to be a very useful educational exercise, whether you usethe software or try to do it by hand.
In fact, each year I have my Schulich MBA students who take my PersonalFinancial Management course prepare a simple tax return by hand, using only apencil and calculator. By walking through the forms, from the Schedule 4 toreport investment income to the Schedule 1 to calculate federal tax owing,students gain an appreciation for how different types of income, such asCanadian dividends, capital gains and employment income, are taxed as well asan understanding of our graduated federal tax brackets and non-refundable taxcredits.
For instance, have you ever tried working through the calculation of taxesowing on Canadian eligible dividends? Well, you first have to gross them up by38% such that you report 138% of the dividends actually received on your Schedule4. Then you calculate your federal tax on your taxable income, which includesthose taxable dividends, before deducting the federal non-refundable dividendtax credit, which is equal to 15.0198% of your taxable dividends.
By going through this exercise, it then becomes obvious why, to cite anexample, your federal marginal tax rate on dividends can be zero for lowerincome earners with no other source of income. For example, if your only incomein 2012 was $30,000 of Canadian eligible dividends, when you gross them up by38% to $41,400 and calculate federal tax of $6,210 (at 15% for income in thelowest federal bracket), once you subtract your non-refundable federal dividendtax credit of $6,218 (15.0198% X $41,400), your federal tax owing is zero.
Confusing? Perhaps, but that’s where the software or professional taxpreparer comes in to make sure your calculations are up to snuff.
Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax& Estate Planning with CIBC Private Wealth Management in Toronto